Expanding wings to India

International School of Management

             This case was written by Vasudga M.

Questions,

1. Discuss the prevailing scenario of FDI in the Indian retail sector?
2. Elaborate on the launch strategy of IKEA in India?
3. Identify the opportunities and challenges for IKEA in India.

Discuss the prevailing scenario of FDI in the Indian retail sector?

        Indian retail industry is rising as one of the most largest and fast paced industries accounting for more than 10 per cent of the country's GDP and around 8 per cent of the employment encouraging large number of domestic & global players to enter in the market. “Until 2011, the Indian Central Government denied foreign direct investment (FDI) in multi-brand retail & single-brand retail was limited to 51percent. In late 2012, the Government of India approved a FDI policy which allowed global retailers to own up to 51percent in multi-brand retail & 100percent in single brand retail. The objective of this paper is to get an insight of the major changes that have been taken by the Indian government regarding FDI policy in Indian retail sector as well as to know the future trends associated with FDI in retail segment”.

        “Retailing encompasses all the business activities that involves in selling goods and services to end users for their personal, family, or household use. Retail is the last link in the distribution channel as it deals directly to the consumers by connecting them to the manufacturer. Indian retail industry has been ranked as the fifth most promising nation for investment with the segregation of organised & unorganised retailing. According to a study by Booz & Co and RAI Indian market is majorly dominated by the unorganised sector & organised sector accounts for 8percent of the total retail landscape. Over the last few years Indian retailsector has witnessed a tremendous growth as traditional markets are making path for new formats such as malls, departmental stores, hypermarkets, supermarkets, discount stores and speciality stores. With the growing market demand due to the change in demographic profile of the consumer and their taste and preferences the Indian retail industry is expected to grow 9 per cent in 2012-16, with organised retail growing at 24 per cent. According to the India Retail Report 2013 (IRIS Research), the Indian retail market is estimated to exceed US$ 750 billion by 2015, which shows strong prospects for foreign players to explore Indian market. With the Indian big business houses like Pantaloons, Aditya Birla group, RPG, etc and the global players like Adidas, KFC, Zara, Levis, etc the organized retailing looking for a higher share in the growing pie of the retail market in India. FDI is an important source of investment in India expecting from multinationals to create ample of opportunities for growth, jobs and research & development. In order to attract investment from foreign investors, economic policy was introduced in the year 1991, since then many changes have been taken place to increase foreign participation. Until 2011, the Indian Central Government denied FDI in multi-brand retail & single-brand retail was limited to 51percent. In late 2012, the Government of India approved a FDI policy which allowed global retailers to own up to 51percent in multi- brand retail & 100 percent in single brand retail. It is expected that the organised retail will now have full access to over 200 million urban consumers in India (approx. 47percent) of which are below the age of 30 with high levels of consumption”.

“There are many recent studies which have recognized technology, labour skills and infrastructure as the key factors or foreign investment. These determinants are significant in order to explain the trends in the geographical structure of FDI at the world capital income, in relation to outbound as well as inbound FDI (Hummels and Stern, 1994). The enormous range og incentives that is announced by the government should also be taken as an important deciding factor for corporate strategies of international location as well as institutional, historical and cultural determinants should also be considered as they influence the investor’s location related decisions. Aqeel and Nishat, conducted study to know wheterher price rate, exchange rate and taxe rate are very important for the FDI. It revealed that these policy variables have the positive impact on the reforms in Pakistan. Some studies have according that, the variables such as market size and differences in factor costs were also found to be important in deciding the FDI location, as these are significant in determining the market economies, which cannot be exploited till the time market achieves a certain size.

The Indian retail industry can now be segregated into a organized and unorganized sectors. It consists of the traditional formats of low-cost retailing like local kirana shop owner, general store, paan/beedi shops, hand cart and pavement vendors etc… Distorted real-estate market, poor infrastructure and inefficient upstream processes, lack of modern technology, inadequate funding and absence of skilled manpower are the characteristics of Unorganized retailing”.

Positive Outcomes of FDI Policy in India:

• Welcoming FDI in Indian retail sector will help to boost up the competition in domestic level retail chain.
• Farmers will get benefit by FDI as it will help them to enter into a contract farming where they can supply directly to the retailer on demand without searching for buyers and could earn good cash
• Consumers will have more options to get international brands at one place and that’s too at a competitive price
• FDI will generate employment opportunity by pooling youth and providing them training in various aspects of retailing.
• Inflow of FDI has contributed in the development of the infrastructure & the construction of the retail industry as foreign players are contributing large scale investment in real estate sector.
• Increasing purchasing power of middle class, nuclear families nuclear families in urban areas, along with increasing working women population will be the key development drivers of the organised retail sector in India.

The retail sector of India is moving under the phase of golden sunshine, encouraging large number of global players to enter in the market. Changes in the Indian government policy regarding FDI in retail sector would promote this industry on the whole economic development and social welfare of the country. It can be very profitable for the country if it is done in the right manner. In future FDI in multi-brand retail upto100 percent can bring about huge investment in technology and real estate, which will flourish Indian economy.

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